New York Supreme Court Commercial Division Allows Fraud Claim Against Law Firm That Advised Hedge Fund On Market Timing Trading Which Resulted In Regulatory Investigation
October 5, 2007
In a decision dated, September 27, 2007, the Hon. Bernard J. Fried, Commercial Division Justice of the New York Supreme Court for the County of New York, granted in part and denied in part Akin Gump Strauss Hauer and Feld LLP’s motion to dismiss a lawsuit filed by the Veras hedge fund families (“Veras Hedge Funds”) in the case captioned Veras Investment Partners, LLC, et al. v. Akin Gump Strauss Hauer and Feld LLP, Index No. 600340/2007.
Veras Hedge Funds allege that they hired Akin Gump to advise them in forming hedge funds to engage in “market timing” trading strategies. Market timing strategies exploit the time lag in the pricing of securities between the close of business in one exchange market (i.e., Japan) and the opening of another (i.e., New York). In order to by-pass mutual funds’ trading restrictions on market timing, Veras Hedge Funds was required to create subsidiary entities through which to trade. Veras Hedge Funds allege that Akin Gump assured them “that their trading activities and strategies did not violate any applicable rules or regulations, and more likely than not, were not subject to sanction.” Akin created and maintained the plaintiff entities that engaged in market timing.
Commencing in August 2003, certain regulatory agencies, including the S.E.C., NYAG, CFTC and Texas Securities Board, began investigating Veras Hedge Funds’s trading activities. Akin Gump represented Veras Hedge Funds in the investigations, but plaintiffs allege the firm had a conflict of interest that was not waivable. Veras Hedge Funds allege that Akin Gump could not represent them because the firm “advised and assisted plaintiffs in carrying out the activities that were under investigation.” Veras Hedge Funds further allege that Akin Gump failed to provide an opinion letter that was promised and did not advise Veras Hedge Funds of the “advice of counsel” defense.
Veras Hedge Funds allege that they were damaged by having to pay more than $36 million to regulators and were forced to liquidate and discontinue operations. Veras also alleges that Akin Gump’s “failures” have exposed them to class action lawsuits by investors in certain mutual funds.
Veras Hedge Funds assert causes of action for gross negligence and negligent misrepresentation arising out of advice and services performed in connection with the creation and maintenance of the hedge funds. Plaintiffs also assert claims for breach of fiduciary duty and gross negligence arising out of Akin Gump’s defense and representation in connection with the investigations. Judge Fried dismissed these causes of action as duplicative of the legal malpractice claims that are based on the same operative set of facts. The legal malpractice causes of action were not the subject of Akin Gump’s motion to dismiss.
Veras Hedge Funds also assert a fraud cause of action arising out of Akin Gump’s ignoring the unwaivable conflict of interest and “advising plaintiffs to do things, and make compromises that were not in plaintiffs’ best interest, all in order to avoid being brought into questions for its own participation in the underlying transactions.” The Court denied Akin Gump’s motion to dismiss the fraud cause of action noting questions of fact surrounding the issue and Akin Gump’s failure to demonstrate a right to relief based on documentary evidence.
Akin Gump, Hedge Funds and a $ 4 Billion Dollar Case
For a while, a million dollar or a multi-million dollar case was a big number. Imagine, not just several hundred thousands! Now, Anthony Lin of the New York Law Journal reports that Akin Gump has been sued by a hedge fund client for $ 4 Billion. Will we be seeing larger than life numbers like this in failed real estate and mortgage transactions, failed hedge funds, failed REIT transactions in this new economic downturn?
"Like most hedge fund managers, James McBride and Kevin Larson expected to make a tidy sum. By the fall of 2003, they seemed well on their way. The series of Veras funds they had launched less than two years before had already attracted around $1 billion in investments.
But then regulators, including then-New York state Attorney General Eliot Spitzer and the Securities and Exchange Commission, came after the Veras funds for "late trading," the illegal purchasing of mutual fund shares after the 4 p.m. market close. Veras wound up paying more than $36 million in penalties before shutting down. McBride and Larson each paid $750,000 and were barred from the industry.
But the ex-fund managers are still out for big money, this time from the law firm they claim advised them that late trading was legal. In February, the former hedge fund managers filed suit against Akin Gump Strauss Hauer & Feld in Manhattan Supreme Court.
Their damages claim? A whopping $4.4 billion, not including punitive damages.
Akin Gump has denounced the suit.
"The allegations of wrongdoing in Veras' Complaint are without merit. At all times, Akin Gump acted ethically and in its client's best interests," said firm spokeswoman Kristen White. "Akin Gump is forcefully defending this case, and we are confident we will prevail."
The suit illustrates the risks law firms face as they try to reap the rewards of representing private investment funds, including hedge funds and private equity funds. Such funds generate high legal bills for firms, but they are apt to strike back hard when they feel lawyers have led them astray."